Safiya Burton, Contributor
BURTON
FROM THE minute you become a parent, you must begin to prepare for responsibilities that will stretch over the next two decades or more. Among the most significant of these in financial terms, will be education, particularly the tertiary education of your child.
Government education subsidies are reducing almost every year as a percentage of the full economic cost of educa-tion. Student loans, which are increasingly difficult to come by, are onerous in terms of interest burdens and frequently still do not cover the student's needs. By the time your child is nearing college or university age, it is usually too late to begin making up for this shortfall. This means that planning for your child's education should begin from the very start of parenthood, and must be carried out in an informed, disciplined, and systematic manner.
Time is one of the most important advantages of investment plans. With the framework and discipline of education plans, you have the potential of realising significant gains from seemingly minimal contributions. The power of compounding returns cannot be overstated.
COSTLY ACTIONS
Consider the following scenario: Beginning when a child is new-born, Parent A invests $20,000 per year over a period of five years, and then stops. Parent B does not start investing for the child's education until it has reached the age of eight, but then invests $20,000 per year over the next ten years. Even though Parent B contributes twice as much as Parent A, when the child is ready for college or university, Parent B's investments will still not be worth as much as Parent A's, and in fact, they will never catch up. When the child is age 18, the education savings will be worth $446,360 under Parent A's plan, whereas Parent B's will only be worth $350,400!
Clearly, procrastinating can exact a costly price when it comes to planning for your child's education. As the saying goes, time is money! You should also note that the more you or your child has to borrow to pay for university or college is the more the power of compounding will work against you rather than for you.
Since the desired end result of every education savings plan is a stream of income that can adequately cover the costs your child will incur in obtaining his or her education, the first step is to estimate the outlays that you will have. You should consider tuition, books and other materials, and basic living costs. If the school to be attended is in another country, you should remember that travel costs may be substantial.
CONSIDERATIONS
When determining which financial instruments to incorporate into your investment plan, consider both the amount of risk involved and your comfort level. Are you comfortable with taking calculated risks? Investing in stocks and mutual funds may serve you well. Or would you prefer a more moderate or even low level of risk? Then you may want to consider bonds and money market accounts. Whatever financial vehicles you finally decide to put to work for you, keep in mind that experts generally recommend a balanced and diversified investment portfolio.
Virtually all investments carry some amount of risk. Even cash held in a savings account runs the risk of being devalued by inflation. Persons planning for their child's education should consider that the younger the child is, and therefore the longer they have until college or university, is the more risk, relative to their own inherent tolerance, that they can safely assume. This means that they will tend to be able to enjoy the higher returns that tend to go along with this increased risk However, this also means they should be careful to consider reducing the risk level of their investments as the child gets closer to the tertiary level.
Once you have an idea of what you will need to provide for your child, you will need to know what your investment options are, how you will choose among them, and what kind of returns you may reasonably expect as a result of your decisions.
Virtually all knowledgeable sources recommend that the investor seek expert advice at this juncture. Your investment adviser will assist you in deciding how to allocate your investments among the various asset classes to achieve the highest possible return at the lowest possible risk, while remaining within your comfort zone. Once the adviser has determined what return you may reasonably expect, he or she will be able to tell you what amounts you will need to contribute in order to reach your goal.
Safya Burton is vice-president for regional markets, GK Funds Management (Cayman) Limited at First Global Financial Services Limited.
Taken from The Sunday Gleaner, September 18, 2005
